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Why Wal-Mart Succeeded Where Target Failed

Target Ticket has been shuttered. Wal-Mart's Vudu, however, lives on.

Target(NYSE:TGT) Ticket is no more. On Saturday, the retailer shuttered its digital video rental service, just a year and a half after its launch.

Truth be told, Target Ticket never really had a chance. When the company unveiled the service, I was skeptical. In my view, Target's lack of hardware and its inability to differentiate its product made it unlikely to succeed.

But Target wasn't the only retailer that attempted to crack into the digital video market. Wal-Mart(NYSE:WMT), through its subsidiary Vudu, also competes in the space. Although it faces many of the same challenges, Wal-Mart's service seems likely to remain viable even as Target's fails.

Wal-Mart was early, and had an advantageThe fall of 2013 was not the right time for Target to enter the streaming video market, especially not with a service that offered so few advantages over the competition. The streaming video market was well established by then: Blockbuster had declared bankruptcy three years earlier (it closed its last stores just a few weeks after Target Ticket's debut). Competitors such as Amazon, Apple, and Google had gotten there first with services that were just as good, if not better, than Target's.

Wal-Mart, in contrast, was early: It acquired Vudu in Feb. 2010, and began working to get the service loaded on many of the TVs it sold in its stores. It also pushed quality: to this day, Vudu is one of the only digital storefronts that allows customers to rent 3D movies, and though it's not as good as physical Blu-ray discs, Vudu's higher-end "HDX" streaming tier is superior to the standard HD offered by most other providers.

A move into hardwareMost of the dominant players in streaming video are also hardware manufacturers or platform holders -- the ability to preload their media stores, and encourage their use, has proven to be a great advantage. iTunes, for instance, comes installed on all Apple products, while Android-powered devices ship with Google Play. Amazon offers its Instant Video on its own Fire tablets and set-top boxes.

Like Target, Wal-Mart has had to rely on others to distribute its Vudu service -- putting it at risk of marginalization. But in January, it went where Target never did: Wal-Mart released its own hardware.

The Vudu Spark is a streaming stick that plugs into any HDTV. Unlike its major competitors -- Apple TV, Chromecast, Fire TV -- it's limited to Wal-Mart's own Vudu service (there's no Hulu or HBO Go, for example) but is significantly cheaper than the competition. It retails for $25, but includes $25 worth of promotional credits, effectively making the device free.

The importance of streaming Eventually, all movies will be purchased or rented through digital streaming services. When that happens, Target will be at a disadvantage, as it will be unable to replace the sales of physical DVDs sold in its stores with digital files sold through Target Ticket. So long as Vudu remains viable, Wal-Mart won't have that problem.

Of course, both Target and Wal-Mart sell many other products -- the loss of physical DVD discs alone won't be crippling to either firm. Wal-Mart includes DVD sales in its "Entertainment" category (which also encompases electronics, toys, cell phones, and video games, among many other products) which generates about 11% of U.S. revenue. Target puts it in "Hardlines" (along with music, books, sporting goods, and video games) which brings in about 18%.

Still, this is one instance where Wal-Mart's management should be applauded for their foresight. Target shareholders, in contrast, might rightly wonder what Target Ticket ever hoped to accomplish.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.